DemandChapter 3

Introduction

As a review: Entrepreneurs and businesses will only make a profit if

they bring something to the market that consumers value MORE than the cost of producing the product or service.

A market an arrangement that allows buyers and sellers to make exchanges.

INDIANA AUTO AUCTION

Demand and the Price Effect

“Price directed economy” Whoever is willing and able to pay the price for the

product gets the product. Why do prices go up and down in the economy?

Law of Demand: an inverse relationship between that quantity demanded of a product and the price of the product.

Law of Demand:

Law of Demand from the economist’s viewpoint Demand: Down to the Dirt

Demand: quantities of a particular good or service that consumers are willing and able to buy at different prices at a particular time.

Hamburgers: If your favorite hamburger’s price rose to $100, how

many would you buy in a week? If your favorite hamburger’s price fell to $.50, how many

would you buy in a week? What price do you feel makes your favorite hamburger a

good value? What is the highest price you would pay for your favorite

burger?

Althea’s demand for gasPrice per gallon Gallons per week

$6.00 5

$5.00 10

$4.00 15

$3.00 20

$2.00 25

$1.00 30

Board Question (Tuesday)

What is the law of demand? The inverse relationship between the quantity demanded of

a product and the price of the product. Is the demand curve upward sloping or downward

sloping? Downward sloping—”down to the dirt”

Buying Power

Prices are incentives and disincentives. How?

Price effect: the inclination (tendency) of people to buy less of something at higher prices than they would buy at lower prices.

Four factors to explain the price effect Buying power Diminishing personal value Diminishing marginal utility Availability of substitutes

Buying Power

Buying Power: the quantity of goods and services a person can buy with a given amount of money.

Let’s look at CD’sQuantity Demanded Price

300 $5.00

250 $10.00

200 $15.00

150 $20.00

100 $25.00

50 $30.00

Diminishing Personal Value

When a good or service can be used for numerous reasons, a person will rank the uses according to their personal value.

People value some of the uses of their products more than others

Diminishing Marginal Utility

Utility: usefulness or satisfaction of an action Marginal: the extra, or additional, costs or benefits

of a decision Diminishing Marginal Utility: the point reached

when an additional unit of a product consumed is less satisfying than the one before Eating at Thanksgiving/Christmas

How does diminishing marginal utility affect prices? Desire for a second item of the same product will be less

than the first. Producers recognize this and will price the second item

less than the first item.

Substitutes

Substitute: a good or service that can replace another good or service. Althea’s use of gasoline-Substitutes

Car pool with friends Ride the bus Ride her bike

Coke and Pepsi Hamburgers or pizza

As the price of a good or service increases, substitutes are sought and used.

Board Question (Wednesday)

What are the four factors that explain why people buy less of an item due to the price effect? Buying power Diminishing personal value Diminishing marginal return Substitutes

Review from Wednesday

https://www.youtube.com/watch?feature=player_detailpage&v=LwLh6ax0zTE

These are all movements Along the demand curve.

Market Demand

Market Demand: total of all individual demands in a given market at a particular demand.

Price per gallon

Althea’s demand

Frank’s demand

Nikki’s demand

Henry’s demand

Market demand

$1.00 30 20 35 60 145

$2.00 25 15 30 45 1145

$3.00 20 10 20 35 85

$4.00 15 10 15 35 75

$5.00 10 10 15 35 70

$6.00 5 10 15 35 65

Price Elasticity of Demand

Price Elasticity of Demand: measure of the impact of the price effect.

How much the quantity demanded will change when the price changes. If the price effect (coefficient) is large, the demand is said

to be elastic Price change would have a large effect on amount demanded

If the price effect (coefficient) is small, the demand is said to be inelastic Price change would have a small effect on amount demanded.

Availability of Substitutes

More available substitutes = More elastic demand

Coke increases their price Substitutes:

Juice Water Pepsi 7-up

Percentage of budget

A product’s price is more elastic when the price is a large portion of the person’s income. Large appliances Airline Tickets Automobiles

Time

The longer the time that people have to adjust to the higher prices, the more elastic the demand for the product is. Gasoline

Initial increase: inelastic; no time to adjust Over time: elastic as people adjust their habits.

Board Question (Thursday)

Give three reasons why the price elasticity would be different for different products. Availability of substitutes Percentage of a budget Time

Relationship between the Price Effect and a Change in Demand Remember:

Market demand: the various quantities of a product that people are willing and able to buy at different possible prices. All quantities at All different prices!

For Demand to change, entire demand curve must shift, either to the right or to the left Right: Demand has increased Left: Demand has decreased

What causes a Shift in the demand curve? Income—normal goods vs. inferior goods Price of other goods—substitutes and compliments Change in the weather or season Number of consumers Tastes and preferences Expectations of future prices/income

Income

When a person’s income goes up: Purchase of normal goods goes up; Purchase of inferior goods goes down

When a person’s income goes down: Purchases of normal goods goes down; Purchases of inferior goods goes up.

Price of Substitutes

When the fall in the price of one good reduces the demand for another good, the two are considered substitutes.

Price of compliments

When the fall in the price of one good increases the demand for another good, the two goods are considered compliments Peanut butter and jelly Hog dogs and buns

Change in the weather or season

Demand for certain products can shift, depending on the season.

Demand for gasoline shifts to the right during vacation season; natural gas for heating also shifts to the right during heating season

Demand for: Snow shovels Speed boats Bathing suits

Number of consumers in the market

Size of the market affects demand The more consumers in the market: demand will shift

to the right;

The fewer consumers in the market: demand will shift to the left

Tastes and Preferences

Fashions change: Clothing

Autos

Expectations in future prices or income Consumers think price will go up in the near future,

demand will increase today; shift to the right.

Consumers think price will go down in the near future, demand will decrease today; shift to the left.

https://www.youtube.com/watch?feature=player_detailpage&v=LwLh6ax0zTE

Start at 2:55 These are all shifts in the Demand Curve